National Financial Partners Corp. Q4 2008 Earnings Call Transcript

National Financial Partners Corp. (NFP)

Q4 2008 Earnings Call

February 11, 2009 8:00 am ET

Executives

Marc Gordon - Head of Investor Relations

Jessica Bibliowicz - CEO

Donna Blank - Chief Financial Officer

Doug Hammond – COO

Analysts

Andrew Kligerman – UBS

Jimmy Bhullar – JP Morgan

Mark Finkelstein – FPK

Eric Berg – Barclays Capital

Jukka Lipponen – KBW

Presentation

Operator

(Operator Instructions) Welcome to the Fourth Quarter 2008 National Financial Partners Earnings Conference Call. I would now like to turn the call over to your host for today’s call Mr. Marc Gordon, head of Investor Relations.

Marc Gordon

Thank you for joining us on our fourth quarter earnings conference call. During this call management may make certain statements regarding their expectations and projections for NFP relating to future results and events which are forward looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995.

These forward looking statements are based on management’s current views with respect to future results and events and are subject to risks and uncertainties that could cause actual results and events to differ materially from those contemplated by a forward looking statement. Forward looking statements speak only as of the date on which they are made. NFP expressly disclaims any obligation to update or revise any forward looking statement whether as the result of new information, future events or otherwise.

We refer you to the risk factors described in NFP’s filings with the Securities and Exchange Commission such as NFP’s annual report on Form 10-K for the year ending December 31, 2007 filed with the Securities and Exchange Commission on February 19, 2008, and NFP’s quarterly report on Form 10-Q for the period ended September 30, 2008, filed with the SEC on November 7, 2008.

Our fourth quarter earnings conference call will be accompanied by a presentation that is available for electronic download on NFP’s website at www.NFP.com/IR or upon connecting to the audio webcast of this call at the same website.

I would also like to mention that as of the fourth quarter of 2008 NFP modified its definition of cash earnings a non-GAAP measure. To reduce cash earnings for the tax benefit of impairment of goodwill and intangible assets the prior periods presented in the earnings release, quarterly financial supplement and the earnings call presentation have been modified to adjust for this change.

At this time I would like to turn the call over to our CEO, Jessica Bibliowicz.

Jessica Bibliowicz

NFP posted solid results for the fourth quarter in a very difficult environment. Our benefits firm had a particularly strong quarter and our efforts to reduce operating expenses across the company were clearly evident. We are continuing our focus on expenses and we are taking actions to further motivate our principals and ensure that we are operating efficiently and cohesively in the current environment and to position the company well for future growth.

Looking at slide six, cash earnings per share was $0.70 per share in the fourth quarter down 15% from the prior year period and $2.46 per share for the full year down 13% from 2007. Operating cash flow was $32 million in the fourth quarter and $71 million for the full year adjusted. Financial results improved from the third to the fourth quarter.

On a sequential basis cash EPS grew 25%, revenue improved 8% and gross margin percentage increased from 17.5% to 19.2%. Impairments during the quarter were higher than they have been in the past due to the impact of the economic environment. The impairments were most at our retail life firm.

Comparing the fourth quarter of 2008 to the fourth quarter of 2007 our benefits businesses posted strong organic revenue growth. This is particularly encouraging since our strategy over the past several years has been to acquire benefits firms in order to increase NFP’s recurring revenue and diversify NFP’s product offerings and earnings.

The increase in organic revenue from benefits firms was offset by revenue declines in our life insurance and financial advisory firms. Overall, same store revenue was down 17% for the quarter and 9% for the year. Net same store revenue declined 13% for the quarter and 7% for the year.

Turning to slide 7, as we talked about in the third quarter, we had four main priorities. The amendment to our credit facility, improving firm profitability, re-motivating our firm principals and reducing corporate expenses. We have made excellent progress in all four categories. First, we amended our credit facility during the quarter to provide more financial flexibility in a difficult environment. We are pleased with the continued strong support of our bank group.

Second, we are 100% focused on improving the profitability of our firm which in this environment primarily means reducing firm operating expenses. Doug and his team have been working with the firms on their operating expense lines since last summer and their work is yielding positive results. Both total and same store operating expenses declined approximately 2% during the quarter. Our principals full appreciate that the NFP model provides a clear incentive for the firms to reduce expenses and increase their earnings. That model is working.

Third, it is important to continue to incentivize the firms to grow earnings. As such, we have implemented in 2009 incentive plan for our firms that further aligns principals and shareholders by rewarding firms if overall 2009 same store earnings grow. This is the first plan in NFP’s history that rewards individual firm growth only if NFP is growing as a whole. The plan will foster a culture where firms are motivated to work together within the NFP network.

Our firms will be focused on growing their earnings whether by expense cuts or revenue growth in 2009 and beyond. In this vain we believe that going forward the most important indicator of the success of our franchise will be same store earnings growth. Moreover, firm earnings growth is generally the metric by which our firm principals are compensated. We will provide this metric on a quarterly basis.

Finally, we continue our work to reduce corporate expenses. After a 30% headcount reduction in 2008 we anticipate 2009 corporate G&A expense will be down at least 10% over the lower than expected 2008 expense.

Turning to slide eight, given the difficult environment, performance relative to base and target has declined. However, 67% of our base attributed to firms owned for over a year is above or within 85% target earnings, down from 71% in 2007 a modest decline. The level of firms in the base deficit remained steady throughout 2008 and did not deteriorate in the second half of the year.

While 2009 will be challenging the long term revenue growth potential of the markets we serve is strong. NFP’s relationships with small business, combined with medical inflation will continue to drive growth in the benefits area. On the life insurance side, the current environment highlights the need for effective wealth preservation strategies, tax advantage well transfer and the value of the fixed return nature of life insurance, particularly in light of the increased clarity regarding estate taxes under the new Democratic administration.

Looking at the financial advisory business, the need for sound and dependent advice has never been clearer. These factors coupled with our current focus on cutting expenses, the superior service our firms provide to their clients and their ability to attract new clients will position us well for the future and fuel our long term growth.

At this time I would like to turn the call over to Donna Blank, NFP’s Chief Financial Officer.

Donna Blank

This morning I will review financial highlights, provide further detail regarding the credit facility amendment and discuss the impact of new accounting pronouncements that will be implemented in 2009.

We delivered solid cash flow in the quarter and year. Operating cash flow was $32 million for the quarter and $71 million for the year. The full year figure excludes the $14.4 million outflow for the purchase of an increased economic ownership percentage of an existing firm in the first quarter. This purchase increased our base acquired from an economic perspective but was included in operating cash flow for accounting purposes.

While operating cash flow was down 34% year over year a portion of the decline should be recaptured in the first quarter 2009 when we will pay out a lower level of principle bonuses related to 2008 performance. As of the end of 2008 principals were due $39 million primarily for bonuses to be paid in the first quarter 2009, down from $68 million at the end of 2007.

Given the reduced amount due to principle, combined with the suspension of acquisition activity and dividends we do not expect the seasonal cash outflow in the first quarter to be as high as in prior years. We plan to use free cash flow to reduce the amount outstanding on the credit facility by the end of 2009.

Turning to slide 10, same store gross margin is the key driver of our results and accounted for 75% or more of gross margin for both the quarter and year. Same store earnings declined 18% in the quarter and 16% for the year. The decline for the quarter reflected a decrease in revenue, partially offset by declines in commission, operating and management fee expenses.

Full year organic earnings were impacted additionally by an increase in operating expenses. Please keep in mind that the same store earnings figures include the impact of the ongoing incentive expense whereas previously the expense was excluded.

Slide 11 illustrates the effectiveness of NFP’s priority position in its firm’s earnings. In a declining earnings environment the percentage of earnings to NFP has increased. A contributing factor to the trend is the increase in our economic ownership percentage of the firm. Over the long term, however, we want to see the firm earnings increase, thereby increasing the absolute and relative level of management fees. This is one of the reasons for the incremental 2009 principal incentive plan that rewards overall organic earnings growth. Doug will discuss the details of the plan.

Looking toward 2009 we expect commission expense percentage and management fee percentage, excluding the impact of the 2009 incentive plan to be in line with historical ratios. We will keep you posted on the impact of the 2009 incentive plan as the year progresses.

Turning to slide 12, G&A in the quarter increased $600,000 or 4% due to a $1.4 million severance change from the headcount reductions at corporate. Overall, Q4 G&A expense was approximately $2 million less than we projected last quarter and we expect 2009 G&A to be down at least 10% from that level.

Impairments for the quarter were $31 million. The current environment caused a higher risk adjusted discount rate and impacted future cash flow assumptions for certain firms. The impairment related to 18 firms over half of them in our retail life business. Due to a new accounting pronouncement we could also see a higher than typical level of impairments in the first quarter which I will discuss further in a few minutes.

Taxes for the full year and quarter were impacted by impairments. Going forward, excluding volatility related to dispositions and impairments we would expect a normalized tax rate of 46%. Beginning with this release we are excluding the tax benefit of impairments from the cash earnings calculation. This is a more conservative approach that resulted in a lower cash earnings figure.

As you will note in our earnings release and quarterly financial supplement, the historical impact on prior quarters has been minimal but due to the higher level of impairments during this quarter the tax benefit had a significant impact.

As Jessica mentioned, we amended our credit facility during the fourth quarter. The amended leverage ratio covenant provides a cushion in this uncertain environment as shown on slide 13. As of year end, NFP’s consolidated leverage ratio was 2.5x EBITDA. During the fourth quarter we paid down $25 million of our credit facility and had $148 million outstanding as of year end.

Effective in the first quarter 2009 we will be implementing the new accounting pronouncement noted on slide 14. SFAS 157 requires us to consider the fair value of our assets from an exit market perspective. We continue to evaluate the specific impact of this standard and we could recognize a significant impairment in the first quarter.

In addition, FASB Staff Position APB 14-1 requires companies to recognize interest expense on convertible notes as if they were straight debt. This will cause NFP to recognize approximately $11 million in non-cash interest expense in 2009 and slightly more in 2010 and 2011. On an after tax basis the impact in 2009 will be approximately $7 million. We expect to add back on an after tax basis this non-cash interest for purposes of reporting cash earnings.

At this time I’d like to turn the call over to our COO, Doug Hammond.

Doug Hammond

I’ll start by discussing the progress we’ve been making in reducing expenses and then provide details on the new 2009 incremental firm incentive plan and the revenue performance of our firms. As shown on slide 16, our firms made good progress reducing expenses in the fourth quarter. Same store operating expenses were increasing at double digit rates through the first three quarters of the year and then declined roughly 2% in the fourth quarter. This is the first time since we went public that same store operating expenses have declined.

Turning to slide 17, as we discussed last quarter, we have instituted a comprehensive initiative for expense reductions at our firms. While the primary focus of this initiative has been on headcount reduction. We are examining every expense line with an eye toward continually improving our operating performance within and among our own firms.

We have focused our initial efforts on firms in the base deficit and since June 30^th, headcount at firms in the base deficit have been cut by over 15%. Our principals have welcomed this initiative because it increases their earnings immediately and improves the long term value of their businesses, their management companies and the overall NFP franchise. Based on these efforts we are targeting a decline in operating expenses of 4% to 5% in 2009.

The impact of the reductions to the bottom line is difficult to quantify due to NFP’s base target structure. As part of this initiative we have now received detailed firm level operating expense budgets from firms representing approximately 90% of 2008 firm level operating expenses which will allow us to continually monitor firm level progress toward our goals.

Moving to slide 18, to jumpstart growth and further motivate our firms to grow earnings we are introducing a new one year incentive plan that rewards firms for both their individual growth and the growth of NFP as a whole. This incentive plan is in addition to the ongoing three year plans currently in place.

Under the new plan our firms will receive cash incentive payments only if aggregate same store earnings grow. Under the plan 50% of such growth in same store earnings will be paid to the firms that contributed to the growth on a pro-rata basis. For purposes of the potential payouts under this plan, same store earnings growth does not include any increase in annual cash earnings derived from the expected corporate G&A reductions in 2009.

This new plan is designed to further motivate our firm principals to grow their bottom line and the earnings to shareholders. The plan aims to reinforce our shared culture and emphasize to our principals that NFP’s success is predicated on the combined efforts of all firms. The plan is designed to encourage firms to do more business within the NFP network when it best suits their clients and to expand into new products, for which NFP has outstanding internal resources such as long term care, property and casualty, stop loss and 401(k) services.

In addition, for firms in the base deficit this plan provides additional incentive to perform. I should also note that we will no longer be issuing NFP common stock as part of the three year ongoing incentive plans due to the number of shares available under our existing plans.

Moving on to organic revenue performance by product line on slides 19 and 20. Group benefits grew net revenue 17% in the fourth quarter and 7% for the full year. Our benefits firms took advantage of new clients, growth in persistency and profitability bonuses and some medical cost inflation. Our middle market client base coupled with client diversity by region, size and industry resulted in our benefit firms being more resilient to the economic pressures of rising unemployment and reduced corporate spending in the quarter.

NFP’s P&C subsidiary is gradually becoming a factor in the growth of our benefits firms which are beginning to leverage its infrastructure to sell P&C products to their benefit clients. While we do not expect 2009 benefits revenue to sustain the high growth rate of the fourth quarter we do expect it to be stable.

In executive benefits, the large new clients had a very difficult fourth quarter in 2007 drove the strong fourth quarter and 2008 revenue performance. In 2009, however, we expect recessionary pressure on this business due primarily to reduced compensation and deferrals. Financial advisory revenue declined during the fourth quarter but remained flat for the year as declines in the financial markets offset the increase in new clients. Given the severity of the 2008 decline in the financial markets our financial advisory firms performed reasonably well and continued to acquire new clients.

Our life insurance business which includes retail life, life settlements and life brokerage suffered from consumer uncertainty, credit market turmoil and financial issues at the carriers. You’ll see our current business mix on slide 21. The increase in revenue from benefit firms reflects both a strong performance relative to our other business lines and our focus on acquisitions in the benefit space over the last several years.

While life insurance had a difficult year it continues to represent a significant portion of our business. As Jessica discussed, over the long term growth in the high net worth life insurance and estate planning markets should resume.

Two thousand nine will certainly be challenging but we are working closer with our firms than ever before on their business planning and budgeting process, carefully monitoring their actual to budget performance as the year progresses. We are confident that this will continue to drive greater efficiencies in our businesses and that the operating expense improvements reflected in the fourth quarter will continue through 2009.

At this time I’d like to turn the call back over to Jessica.

Jessica Bibliowicz

Although we’re in the most difficult economic environment any of us has ever experienced NFP maintains a sound business model and operates in attractive markets with strong long term growth prospects and importantly our firms are among the most respected advisors in their field. Together we are working hard to operate efficiently and cohesively during this downturn so that we are well positioned for an eventual recovery. We renegotiated our credit facility to give us more financial flexibility.

We are reducing expenses at all levels of the company, driving to improve revenue and generate good cash flow. We continue to shift the balance of our business towards the benefits business. In short, we’re controlling the variables we can control to build long term value for our shareholders.

At this time we’d like to open the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Andrew Kligerman – UBS

Andrew Kligerman – UBS

The first question would be around slide 18, could you put some numbers around that in terms of how big the pool would be and to what degree? Is there a scale around same store earnings increases; does it scale up and down? Could you put some numbers around that?

Doug Hammond

As a base line number we’re at $182 million this year in ’08 of same store earnings growth. To the extent there’s any growth off of that number in 2009 in that same store set then 50% of that pool would be distributed to the firms on a pro-rata basis. That number excludes any aggregate cash earnings growth based on the corporate reductions that we’ve announced.

Andrew Kligerman – UBS

With respect to the sales outlook it’s been really rough in the last two or three quarters. I know you don’t have a crystal ball and I can hear all the initiatives that you’ve got in place. How do you think its going to go in the next few quarters?

Jessica Bibliowicz

On the life side?

Andrew Kligerman – UBS

Across the board, overall, given all the pressures, given the fact that sales have already dramatically declined do you think directionally that you’re still in a down mode or can you buck the trend?

Jessica Bibliowicz

It’s a tough thing to predict in these markets. I do believe that our firms are really very focused on doing the right thing with our clients. They’re in there evaluating cash policies, they’re looking towards the future, they’re thinking about writing smaller business so that they can get people engaged in the estate planning process and not thinking overall about how large their net worth is. If anybody can do the job in life insurance it’s our firms on the retail and the brokerage side. They’re as well positioned as possible.

I also think that size and scale helps our firms in this environment because we do have so many carriers that we have large relationships with that they can really gravitate to the carriers where clients have the most confidence in their financials. Yes, we’re coming off of a low base after ’08. I think our firms have been through some very tough cycles before, they are experienced. I think they are focused on the right client needs and I think they’ll do as good a job as possible in that marketplace but I think particularly in the first half of the year you have to be very cautious in your outlook.

We gave some pretty positive results on the benefit side of the business and we again expect that to continue to be stable. That is a business that is not optional for the employers; they will provide these services to their employees. There is definitely pressure on the business but we think our firms are the trusted counterparty to those employers and we also believe our firms are more competitive at bringing in new business so we are generally positive there.

In investment advisory as we said, it’s going to be a tough time but the independent advice that our firms offer and their expertise and their experience will set them up better than anyone else. That coupled with very good expense management and weathering the downturn should position us reasonably well for the year.

Andrew Kligerman – UBS

Around the impairment, with SFAS 157 could you give us sizing of the impact in 1Q? What makes you think that you got the impairment number right in the fourth quarter, $31 million, that’s the biggest you’ve ever had, 5% of goodwill. What gives you confidence that you’ve got it right going forward?

Donna Blank

The impairment number was influenced by the economic environment so we did, as I said, risk adjust the discount rate and the cash flows. I don’t think there’s a right answer on impairments. What we came up with was within the range of reasonable given everything we know about what the firms performance is like and what we anticipate in the future. That number could change over time. I don’t think there’s a right answer, it’s in the range of reasonable.

In terms of 157 it’s very hard to say right now exactly where we’re going to land. I would point out though that that number, whatever ends up being is scoped out of the credit facility because when we were negotiating the amendments we knew this was coming down the pike and we hadn’t really ironed out all of the implications from an accounting point of view. Any change from 157 will be scoped out.

Operator

Your next question comes from Jimmy Bhullar – JP Morgan

Jimmy Bhullar – JP Morgan

Obviously you’re revised credit facility which is a plus. I think you mentioned you’re at 2.5 on your leverage ratio. Do you believe there’s a possibility that if results remain weak that you could hit the new targets or the new limits on that by year end or do you have other sources of liquidity or have you stress tested and fielded that’s unlikely.

Secondly, overall if you can comment a little bit on morale for your employees and the principal of the stock is down and you’ve also had an expense savings program, how is this affecting retention of employees at headquarters and morale overall?

Donna Blank

If you looked at the slide we had on slide 13 shows you the credit facility ratios and the fact that we’ve built in extra cushion in the beginning part of 2009. We have obviously stress tested it and right now we’re feeling comfortable with the margins.

Jimmy Bhullar – JP Morgan

You are, right now, very close to where the limit is for year end. Obviously you’ve got some cushion in the first half of the year.

Donna Blank

We’re at 2.5 now. The amended limit is 3.0.

Jimmy Bhullar – JP Morgan

For year end or right now?

Donna Blank

For year end 12/31/08.

Jimmy Bhullar – JP Morgan

No, I’m talking year end ’09, ’08 is gone. My point is that you have other sources of liquidity or things that would allow you to have more of a cushion as you get into the later part of the year.

Donna Blank

Since we are not planning any large acquisitions or paying dividends at this point we’re going to use all of our free operating cash flow to pay down the facility. We’re expecting to be in line with the plans that we have submitted to the banks and have cushion in that number.

Jessica Bibliowicz

As it relates to morale, that’s a very important issue. It is clear to all of us at this company that the stock price is very much dislocated from the performance of the company. As it relates to corporate, we did dramatically reduce headcount. Everybody is doing more but they certainly feel the success of their labors and that really brings people together and the team has been selected to be cohesive and to work very closely with the firms and I am extremely proud of their performance.

At the firm level I would say the same kind of focus applies, everybody is focused on their clients. It is a very client centric environment. There too, we have many firms that are performing extremely well even in this environment; they are very needed by their clients. In general, the focus is on the performance, the variables we can all control and we can deliver. That’s where everybody stays focused and it provides the best long term results.

Operator

Your next question comes from Mark Finkelstein – FPK

Mark Finkelstein – FPK

In your firms are you having to change any of the target earning metrics from what the high watermark has been historically? Are you having to lower any of these, particularly in the retail life side?

Doug Hammond

The analysis that we’re doing with the firms through this whole process is really evaluating a number of things. First evaluating what their performance prospects are moving forward and also taking into consideration what their income needs may be to get them through a very difficult period. Where the firms performance has deteriorated significantly and we believe that an ongoing relationship with the firm is warranted based on our view of their future profitability and success then on a case by case basis we look at it and we will restructure a transaction.

Jessica Bibliowicz

Historically we have done restructures over the years that’s part of running a business like this.

Mark Finkelstein – FPK

There are scenarios where you are taking down the target earnings metrics that are for their incentive comp?

Doug Hammond

Yes.

Mark Finkelstein – FPK

Thinking about this incentive comp pool a little bit it doesn’t sound like you’re making any other changes to the ongoing incentive plans. How should we think about this in terms of IRRs on overall? You’ve historically put in growth metrics here’s kind of the IRRs which we would expect. Now we’re implementing another form of cash that would ultimately in order back to the underlying owned firms. How should we think about that in terms of projected IRRs on these investments that we’ve made in these firms?

Jessica Bibliowicz

Right now it’s a one year plan. It’s designed around 2009. We would all be pleased if can see growth over 2008. Yes, if you do the math it will lower the IRR at least temporarily. In terms of an incentive especially one that is based on overall NFP performance we think it would be great. We would all be thrilled if we got to there.

Donna Blank

It’s a worthwhile investment.

Operator

Your next question comes from Eric Berg – Barclays Capital

Eric Berg – Barclays Capital

My questions involve an attempt to understand better than I do how this incremental incentive plan would work. My first question is to confirm, am I right when I say that if some of the same stores increase their earnings this years versus 2008 but overall if there is not same store earnings growth then nobody gets paid the incremental bonus?

Doug Hammond

That’s correct.

Eric Berg – Barclays Capital

Most importantly, I wanted to work through a really simple arithmetic example of how this might work just inform my understanding. Let’s say you had a firm that generated earnings of $100 in 2008, my understanding of the way the business works is that that operator would have received, in the form of a management fee $45 out of the $100. Let’s say that same individual took his earnings to $120 from $100 in 2009. Is the idea that he would receive the $45 plus the half of the $20 increase or $45 plus $10 or $55 on the earnings of $120?

Doug Hammond

It doesn’t really work that way because it’s very dependent on the performance of the firm in 2008. It’s on the overall performance and it’s dependent on the firm’s performance in 2008. If a firm, for example only grew if they had $100 base and a $200 target for example and their growth was to $150, $50 of those dollars would move directly to the firm principals and NFP would not share in that growth and there would be no increase in same store earnings relative to that firm. That firm would not participate because 100% of the incremental growth of $50 would go back to the firm as a management fee.

If the performance was all in the base, so he was at $0 in 2008 and went up to $100 that’s 100% incremental to NFP then they would participate in the pool accordingly.

Jessica Bibliowicz

The best way is to think about it from a top position would be if the number is $182 million and just for ease, same store growth was 10% so that would roughly fund the pool at $18 million. Nine million would be allocated to firm principals who grew over last year in the quarter under the circumstances that Doug described.

Eric Berg – Barclays Capital

In your illustration the $182 million was presumed to be same store earnings?

Jessica Bibliowicz

Yes, that right only earnings. That’s what we love here. They grew 10% that would be $18 million overall NFP, $9 million to the firm principals based on their gross margin contribution relative to others they would then get their portion of that $9 million at the end of the year. That’s the easiest way to understand it. Therefore it makes them think about their bottom line as well as Doug mentioned in his comments, where cross selling can happen, where if appropriate they can be using our life brokerage organizations or whatever to really help the whole. That’s the spirit behind the bonus plan.

Eric Berg – Barclays Capital

In thinking about the management fee, maybe that’s how I’d like to ask my final question. Right now we have a situation in which roughly your management fee percentage in ’08 was in the mid 40’s. I tend to think of that as how much of the gross margin is being remitted back to the firm operators and entrepreneurs from the shareholders. How should we think of how the management fee percentage could be affected as a result of this incremental incentive program?

Donna Blank

It will really just depend on how big the pool ends up being and the same allocation that Jessica just mentioned.

Jessica Bibliowicz

We will report to you directly on the progress of this pool.

Doug Hammond

Like the three year incentive plans this number will be included within the management fee expense.

Operator

Your next question comes from Jukka Lipponen – KBW

Jukka Lipponen – KBW

In looking at slide 19 as you showed and discussed you’ve had growth in the benefits firms and declines elsewhere. How would you respond to the argument that this illustrates the fact that you are having growth at the recently acquired firms and not having growth in firms that you’ve owned for a while?

Doug Hammond

Because we did a large amount of acquisitions in the retail life area early on that certainly is the case. Although there are some exceptions of outstanding older firms performing. The major factor there is the state of the life insurance market right now and the difficulty getting cases closed in this senior high net worth marketplace.

If you look back a couple of quarters, I don’t know exactly when we provided the information the performance of our older firms when the life insurance markets were better we’re certainly performing at fine rates. Most of them continue to be very engaged in the business and are plugging away. It’s a rough market on the life side and it’s really driven by a number of factors that Jessica discussed.

You’ve got a lot of financial turmoil at some of the life insurance companies. NFP’s presence in that space and the number of counterparties that we do business with that are in perfectly fine financial condition is certainly helping us but there area lot of counterparties that are struggling these days. The depletion of wealth and the high net worth market and the tighter underwriting standards in the senior market is also impacting that market as we move forward.

Jessica Bibliowicz

Even in the 2006 period which was a particularly strong period for life insurance the life insurance side of the business we have felt that diversification was critical and that’s why we really used the acquisition type line to build out that benefits business and make sure that in difficult markets we answered with a more diversified product base. The beauty of benefits is that our firms are the strongest on that part of the industry and also that the revenue is recurring. This is really by design to see the diversification.

Doug Hammond

One other point I would say is while some of the retail life insurance firms are certainly having the most difficulty in this environment the life brokerage firms many of them are firms that have been around from the very beginning and their performance on a relative basis continues to be extremely strong. It’s a testament to the broader demographics of their business and how their situated in the marketplace. Many of those are class of ’99, 2000, and 2001 firms that are performing very well on relative terms in this market.

Jukka Lipponen – KBW

In the retail life space, given your size, scale and scope that you’ve talked about and all the things that you can offer to your firms one would think that you would be gaining market share in this kind of environment but comparing your results against the LIMRA statistics would seem to suggest that you’re losing market share. Am I thinking about it incorrectly or how would you respond to that?

Jessica Bibliowicz

The issue with LIMRA surveys is that they tend to be very broad in terms of their data on life insurance whereas our retail firms are generally very focused in the high net worth older age markets, well transfer markets. We deal with a much smaller component and that based in that marketplace it would be contrary to what you’re suggesting.

With our brokerage, part of why they have been stronger through this period is that they do have a somewhat wider demographic base and anecdotally we are pretty confident that they are in fact gaining market share in this environment.

Jukka Lipponen – KBW

With respect to free cash flow generation, how should we be thinking about that? Obviously you’re operating cash flow in 2008 was down significantly year over year but it appears to me that you got hit with a double whammy of paying down the amounts owed to principals from strong prior performance while then in ’08 the overall company performance was down significantly.

Should we expect that if the overall performance of the company remains about the same as it was in ’08 everything else being equal that the cash flow would not decline the same way that it did in ’08 because of the pay downs of the amounts owed to principals?

Donna Blank

You’re right about that. We did get hit by the fact that revenues and earnings performance overall declined in ’08 and we had to pay for good ’07 performance in the first quarter of ’08. All else being equal we would expect the cash flow in ’09 to be better than in ’08 if it’s the same as ’08 performance.

Jessica Bibliowicz

Obviously with the dividends and the acquisitions and the buy backs out of there we have drastically reduced the use of cash so that’s helped bolster our position as well.

Jukka Lipponen – KBW

When you talk about the corporate expense reduction of 10% what is the base number that you’re referring to?

Donna Blank

We’re referring to the ’08 actual.

Operator

This concludes the question and answer session for today’s call. I would now like to turn the call over to Jessica Bibliowicz for closing remarks.

Jessica Bibliowicz

Thank you all and I wish you all a good day. Of course we’re here if there are any further questions. Thank you very much for your attention.

Operator

Thank you for your participation in today’s conference. This concludes the presentation you may now disconnect.

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